With the right structure around your retirement, you can achieve your goals and live your ideal retirement successfully.
A movement called FIRE — Financial Independence, Retire Early – gained popularity during the COVID-19 pandemic. FIRE redefines wealth as a means to align with your values. The premise is widely attributed to a 1992 book, “Your Money or Your Life,” by Vicki Robin and Joe Dominguez.
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FIRE represented freedom from long commutes, endless cubicles, mindless meetings and office politics. College graduates were frustrated about an inability to get ahead. The pandemic was the catalyst that enabled remote workers to squeeze in additional gig work, making the FIRE lifestyle promising.
Then, employers started enforcing return-to-work (RTO) edicts and workers scrambled to become properly situated again. Inflation started rampaging and layoffs emerged in many sectors previously flush with cash. Amidst the chaos and rocky economy, many FIRE members found the financial discipline required to be far more complicated than expected.
The FIRE movement started dying down to embers. But, as the economy has swung back into more positive territory, it has taken on a new momentum, albeit with some fresh subsets.
The FIRE movement is not successful merely by picking the right investment portfolio. Rather, it is a complete understanding of the clarity of thought, investment discipline and planning that will make or break your goals.
Early financial independence is attainable by crafting a plan that addresses these 11 key questions:
1. What will retirement look like?
2. How much are you spending each month right now?
3. How will your expenses change in retirement?
4. Do you have additional sources of income?
5. How will you invest for growth?
6. How will taxes and inflation affect your goals?
7. How much can you safely withdraw each month in retirement?
8. How does your health play a role?
9. What about stock market shocks, elderly parents and other unexpected expenses?
10. How will you stay informed of changes that can positively and negatively affect your plans?
11. What is your backup plan?
1. What Will Retirement Look Like?
To craft a plan, you need a destination. It is impossible to create an efficient path without an understanding of what point A looks like, as well as the desired point B. Getting this first question right will be significant to your entire plan succeeding.
The FIRE movement has morphed into several different paths. All are still focused on a shorter traditional career path by a heavy emphasis on both investing and increasing income. However, not all people want retirement to be a cookie-cutter approach, either.
The common denominator between each style of FIRE is that you get to define your time, no matter if it is Monday morning or Saturday night. You may rely solely upon your investments, but you also may desire to become an entrepreneur or take in a bit of part-time work. You may want to completely change careers and go from being a doctor to becoming an artist. You may choose luxury travel or seek obscure hideaways in remote locales. Your desires may change frequently over a 30-, 40- or even 50-year period.
Here’s an overview of the different FIRE styles:
— Traditional FIRE is for those who want a typical retirement, but at the earliest age possible.
— Lean FIRE is for those who are seeking a very minimalistic way of life. They want to be completely independent of all working obligations and have their savings covers all their basic needs.
— Fat FIRE is for those who want to retire early while saving significantly, but then live more lavishly during their retirement years by spending fully.
— Slow FIRE is more aligned with those who need to pay down significant debt before they are able to begin accumulating.
— Barista FIRE is being able to have saved enough to retire from a primary job, but voluntarily work at a part-time position for extra funds and, often, health insurance benefits.
— Coast FIRE is accumulating a very large sum of money as quickly as possible and then letting investments and time cover the balance.
2. How Much Are You Spending Each Month Right Now?
Point A is what your current outflow of money is today. Many people do not have an accurate pulse on their current expenditures and do not realize that their lifestyle is supported by debt. This step is often the one that causes most people to turn away from FIRE. It can be daunting to reduce your spending as definitively as required so that you are saving 50% to 70% of your income from all sources.
FIRE calculates your savings goal as 25 times your annual expenses. If your monthly expenses are $6,500, you would multiple $5,000 x 12 to get an annual expense of $60,000. Then, multiply $60,000 by 25 to get your FIRE savings goal. In this example, your FIRE goal would be $1.5 million.
3. How Will Your Expenses Change in Retirement?
The modern workplace has eliminated the need for many traditional expenses such as dry cleaning. Therefore, it is more accurate to expect that your retirement expenses will not decrease, but change. Talking with people currently living the lifestyle you desire will give you realistic insights and help you avoid expensive surprises. For example, while being a travel blog writer may sound glamorous, you may need pricey and hard-to-maintain equipment that is a challenge to travel with internationally.
Renting abroad is a wonderful way to minimize daily expenses. Being an expatriate on a visa allows you to stay in another country for a set period before being required to exit. Golden passports, while expensive, offer the ability to live in your desired country as a citizen, opening up significant benefits such as public health insurance. However, small expenses like foreign transaction fees on credit cards and currency conversion fees are the types of hidden expenses that can quickly upset the best-laid strategy if not accounted for in your planning.
Many believe that Social Security will soon be defunct, but it can be an important income source even if it looks very different than it does today. However, benefits will be reduced if you work for less than 35 years or stop working before retirement age, and low-earning years are not replaced by later, high-earning years in your benefit calculation.
The lack of an active income source can make getting mortgage, auto and other consumer loans more challenging.
4. Do You Have Additional Sources of Income?
The most important way to increase your available income is to pay off debt, especially credit cards. Every dollar charged is working against your goals, along with the penalty for use (i.e., interest).
Many people will work a second job. This work may be part-time in the hours around their primary job and can be an excellent way to gain expertise to leverage into a promotion or learn the new skills they plan to use in retirement. This is a good time to get a new business up and fully running. Small businesses lend themselves well to tax planning and may provide deductions that are unavailable to a traditional W-2 employee.
FIRE investors are often proponents of rental property ownership. A multifamily unit can enable them to live in one unit and generate passive income while renting out the remaining units.
Note that many early FIRE investors were caught unprepared when they overpaid for hot properties. Some couldn’t cover the mortgage when the market cooled and failed to factor in maintenance costs, unpaid rent, and damaged or destroyed properties.
5. How Will You Invest for Growth?
With 15 fewer years to reach your goal, an investment portfolio maximizing growth will be important in order to provide the returns needed to accumulate significant sums in this truncated time frame.
Diversification is especially critical, as there is less time to recover from costly investment mistakes.
Not only are the investments themselves important, but the kinds of accounts they are held in will be impactful.
— Qualified retirement plans — such as 401(k)s, individual retirement accounts (IRAs) and health savings accounts (HSAs) — require assets to remain invested until age 59 1/2 to avoid IRS taxes and significant penalties. Additionally, there are contribution limits for each type of account.
— Roth IRAs will allow your investments to grow tax-free and, under current law, you can withdraw your money tax-free in retirement. While you will pay incomes taxes up front, this gives you incredible access when you are ready to retire.
— An after-tax brokerage account will give you the greatest flexibility in accessing funds. There are no contribution limits, and you can withdraw the funds at any time.
Low-fee index funds are popular investments among FIRE advocates. While these funds have historically excelled over actively managed funds, their success was often due to the lower cost structure rather than being superior investments. Flat-fee financial planners are a new type of professional planner that can help you craft a portfolio that has suitable growth investments for your risk tolerance, alongside low fees.
6. How Will Taxes and Inflation Affect Your Goals?
Your advisors can also help you learn how taxes and inflation may affect your outcome.
Taxes can be incurred before, during and after converting the investment to income. You can learn how to sequence your investments to minimize taxes further. A professional tax and legal advisor is important if you have a business entity, especially if you are living abroad.
After two years of high inflation, more people understand how quickly it can erode spending plans. In order for your money to sustain your lifestyle, it will be important to invest aggressively enough to outpace inflation, but remain within your risk-tolerance comfort zone.
7. How Much Can You Safely Withdraw Each Month in Retirement?
FIRE advocates have stipulated that you can safely withdraw 4% per year, based on a long-held planning premise created by William P. Bengen in the early 1990s.
A lot has changed since his advice was adopted by the financial community:
— Expected lifespans have increased. Bengen’s model presumed a 30-year retirement span, but a FIRE participant has to take into account that they may be covering time frames as long as 50 years. In 2020, the U.S. Census revealed that more than 75,000 people were still living at age 100.
— Bengen also included full Social Security benefits, which have long been speculated to require modification in order for the program to remain viable.
— Bengen’s methodology used actual market results, including the stock market crash of 1929. The results would vary considerably if the events occurred in a different order over the same time frame.
A financial advisor can help you determine a reasonable withdrawal rate appropriate to your unique situation and, most importantly, your risk tolerance.
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8. How Does Your Health Play a Role?
When you are in your 20s, it is truly hard to imagine how your health will change over a lifetime.
The biggest potential expenditure in your lifetime is predicated on employment. If you are not working and are under age 65, with few exceptions, you will struggle to find quality affordable health insurance, even with the Affordable Care Act. If you go abroad, few of your normal insurance options are available.
Even the best health insurance does little to cover the impact of longevity, and Bengen’s 4% withdrawal model wildly underestimated health care costs. The nonprofit National Investment Center for Senior Housing and Care reports that assisted living runs $5,806 per month, a nursing home residence is $10,830 monthly and memory assistance facilities can exceed these costs, depending on the level of care required. According to the Department of Health and Human Services, more than half of Americans over age 65 will require long-term care.
9. What About Stock Market Shocks, Elderly Parents and Other Unexpected Expenses?
We cannot perfectly plan for unexpected challenges. Many FIRE advocates had never experienced anything but ideal investing conditions due to an extended bull market. Our current economy is improving from the recent historic inflation, but the increasing military conflicts and climate issues can bring uncertain markets. All of this before mom breaks a hip or the A.C. unit finally goes out. Sometimes an emergency fund will close the gap, but for early retirees, these financial shocks can create greater headwinds.
Early retirement requires you to be financially capable of caring for yourself for the rest of your life without another dollar coming into your bank account.
The longer you are away from your career, the harder it will be to return to it and be re-hired. You will either have to invest in new education and training, accept a lower-paid job or possibly be unemployable.
If you dial back all of the assumptions in your plan, you are less likely to be blindsided when it is harder to correct. Your financial advisor can also help you stress-test your portfolio.
10. How Will You Stay Informed of Changes That Can Positively and Negatively Affect Your Plans?
No financial plan of this importance should ever be a one-and-done. Over 50 years, it is impossible for things to remain the same, and flexibility can be your greatest asset. Staying apprised of both local and world events is an overlooked need.
11. What Is Your Backup Plan?
According to the Bureau of Labor Statistics, only 25% of new businesses make it 15 years or more. Most businesses fail because the founders didn’t do enough homework, didn’t build an enduring plan or didn’t have enough funds. You are seeking an endeavor that may span more than 50 years.
Having a backup plan is not admitting to failure before you begin; rather, it is a way to ensure that you will have options. You may decide that living abroad sounded better on paper than in real life. You may realize that you miss a certain kind of food or favorite relative. Perhaps the extensive experience you gained in the corporate world did not translate to the gig economy. This isn’t a failure. It’s an acknowledgment of learning more about yourself.
Your backup plan needs to give you a runway toward reintegrating into the workforce. Maintaining your professional network is free, and your connections will be vital if you choose to restart.
Senior workers are growing in numbers, too. About 20% of adults over age 65 are either working or looking for work, according to AARP, which cited data from Washington, D.C.-based investment company United Income.
When considering early retirement, remember that “early” does not necessarily mean “forever.” You may find yourself enjoying a series of careers over your lifetime. As long as they bring purpose, yield resources and align with your dreams, your retirement plan can look any way that you would like.
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Update 01/29/24: This story was previously published at an earlier date and has been updated with new information.
